Saving Capitalism

Sta. Ana is the Coordinator of Action for Economic Reforms. “Saving Capitalism” was published in the November 17 edition of the BusinessWorld, pages S1/4 to S1/5.

The title of an Associated Press (AP) report was: “Bush warns: Don’t disturb capitalism.” The story, however, did not state whether George W. Bush really uttered those words.

Yet, the title captures the gist of Bush’s speech that he delivered at the Federal Hall on Wall Street. The speech was intended to communicate the US position for the meeting of the G-20 countries—a group of highly developed countries and some influential developing countries called emerging markets. The crucial G-20 meeting was an occasion to address the collective action problems in response to the global financial and economic crisis.

The AP story quoted Bush extensively:

“We must recognize that government intervention is not a cure-all.”

“Our aim should not be more government. It should be smarter government.”

“ It is true that this crisis included failures, by leaders and borrowers, by financial firms, by governments and independent regulators. But the crisis was not a failure of the free-market system. And the answer is not to try to reinvent that system.”

The lame-duck president is living in a different world. He wears blinders. He wishes to apply his ideology at all times. But his conservative economic creed of less government loses relevance in times of economic crisis.

Bush dislikes more government. But what do you call the US government bailout of financial institutions, amounting to more than US$700 billion? The fact is, the bailout was a necessary though insufficient condition, to restore confidence in the financial system and keep credit flowing, so as to resuscitate the real economy.

And to disparage government intervention, Bush uses the trick of inserting a red herring in his speech: “government intervention is not a cure-all.” Only dumb people believe in a panacea.

But Bush is correct to say that we need “smarter government.” Indeed a smarter government would have taken precautionary measures through policy and regulation and could have thus averted a deep crisis. Unwittingly, Bush’s statement about “smarter government” merely confirms that he or his government isn’t smart. The US and the rest of the world are fortunate for two related reasons: First, Bush would no longer be around to preside over US policies and institutions. Second, the successor is Bush’s opposite.

One metaphor that best describes the current crisis of capitalism is the “gale of creative destruction.” Raul Fabella, professor at University of the Philippines School of Economics, re-introduced this metaphor when he spoke in a public forum about the Philippine economy. Raul borrowed the term from Joseph Schumpeter. The “gale of creative destruction,” is precisely what makes capitalism resilient. Destroy the old and build the new. Thus, the current crisis will destroy the free-market model, which was dominant for at least two decades, and deflate its “triumphalism.” Supplanting it will be a system that enhances the role of government, institutions, and regulation in a market economy.

Recent actions taken by the riches countries—e.g., recapitalization and nationalization of banks as well as enormous fiscal spending—have socialist characteristics.

But what’s wrong about having socialist features or having socialism? The conservatives have labeled Barack Obama socialist. His plan to introduce universal health coverage in the US is socialistic. In fact, Hillary Clinton’s proposed health reforms are more radical than Obama’s program. That makes Hillary not only a feminist but a socialist, too. So what?

Schumpeter, who did not advocate socialism, nevertheless thought that socialism could not be avoided. In his address titled “The March into Socialism,” Schumpeter said “the capitalist order tends to destroy itself and that centralist socialism is…a likely heir apparent.”

Schumpeter gave three reasons for believing that capitalism is destroying itself and that socialism is the likely alternative. It is not capitalism’s failure but its successes that will lead to its demise.

First, Schumpeter thought that technological progress and bureaucratic administration in modern capitalism eventually stifle entrepreneurship and innovation.

Second, the advance of capitalism leads to the dominance of large corporations and the decimation of social strata such as small businessmen and farmers that are pillars of individual proprietorship. This weakens capitalism’s institutional scaffolding.

Third, capitalist culture promotes rational and critical thinking, and this leads to the emergence of deep intellectuals who turn against the system. To illustrate, the communist leaders in the Philippines, the Lavas and Jose Maria Sison, came from the elite and were products of the best schools.

Socialism, too, has its own version of creative destruction. Old socialism—the central command economy—has vanished except in a surreal place called North Korea. The “actually existing socialism” is a market economy. And it is in the socialist economies of developing countries where rapid growth has occurred—in China and in Vietnam. The social democrats likewise claim they are socialists. And surely, living in the Scandinavian countries is like living in heaven.

Markets and competition on the one hand and socialism on the other hand can thus co-exist. In fact, they can complement each other.

As leaders put in place the new reforms to tackle the present and future economic global crises, we can expect a further convergence of so-called capitalism and so-called socialism.

As the unrepentant communist but “capitalist roader” Deng Xiao-Ping once said, it does not matter whether the cat is black or white so long as it catches mice.